Life and Death Planning for Retirement Benefits

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240 Life and Death Planning for Retirement Benefits
Here are the types of traditional retirement plans a participant may “convert” to a Roth
IRA.
A. Individual retirement accounts. An “individual retirement plan” may be converted to a
Roth IRA. Reg. A-5. “Individual retirement plans”
include individual retirement accounts (IRAs) and individual retirement trusts (IRTs; ¶
6.1.07) under Traditional IRA-to-Roth IRA conversions have been permitted
since 1998. See for the tax treatment of converting an IRA. Se for how
to convert an IRA.
The Code provides that a SEP-IRA or SIMPLE IRA cannot be
“redesignated” as a Roth IRA. That prohibition is almost meaningless because, in the
real world, a traditional IRA is not normally converted to a Roth IRA by being “redesignated” as
a Roth IRA; it is converted by having assets transferred from the traditional IRA to an entirely
different account (with a different account number and form of agreement) that is a Roth IRA. The
IRS clarifies (in Reg. A-4) that “An amount in an individual’s SEP IRA can be
converted to a Roth IRA on the same terms as an amount in any other traditional IRA,” subject to
two limitations:
 A SIMPLE IRA distribution “is not eligible to be rolled over into” a Roth IRA
“during the 2-year period...which begins on the date that the individual first
participated in any SIMPLE IRA Plan maintained by the individual’s employer....”.
Reg. A-4(b); and,
 Contributions under the SEP or SIMPLE plan may not be made to a Roth IRA. Reg.
A-4(c).
Accordingly, an employee whose only retirement plan is a SEP-IRA, and who wants a
Roth and nothing but a Roth, must go through this two-step dance: Employer contribution goes
into the (traditional) SEP-IRA, and the employee pulls it out and transfers it to a Roth IRA. If the
employee’s plan is a SIMPLE, he must satisfy the two-year waiting period before performing the
second step of the “dance.”
B. NonIRA plans. Prior to 2008, the Code permitted rollovers into Roth IRAs only from
IRAs and DRACs Thus, someone who desired to “convert” money in a traditional
nonIRA retirement plan had to first roll the money to an IRA, then convert the IRA. The
expanded rollover provision effective in 2008 and later years permits rollovers into Roth
IRAs directly from several additional types of eligible retirement plans, eliminating the
necessity of the two-step process in the conversion of nonIRA plans (though the two-step
process continues to exist hypothetically in the tax treatment of these conversions; see
A)). See for the tax treatment of nonIRA plan-to-Roth conversions. See
for how to convert a nonIRA plan. Here are the types of nonIRA plans that may
be converted directly to Roth IRAs:
1. Qualified retirement plans under (“QRPs”). (first sentence),
2. 403(a) and (b) contracts and plans. (first sentence),